Indiabulls plays the tech card to stay ahead

Real estate market is perceived to be in dumps, and demonetisation has dealt it a near-fatal blow

In the two and a half years since its promoters (Sameer Gehlaut, Rajiv Rattan and Saurabh Mittal) decided to part ways in July 2014, the Indiabulls Housing Finance scrip has risen more than twice. In this, the Sameer Gahlaut-controlled company has outperformed peers like HDFC, LIC Housing Finance and DHFL (see On a strong footing).

Gagan Banga, the vice-chairman and managing director of Indiabulls, says with discernible satisfaction that his company is where HDFC was in 2008: assets under management of around  Rs75,000 crore, and net earnings of around Rs2,400 crore. And his targets are ambitious: loan book of  Rs150,000 crore and earnings in the range of Rs5,300-5,500 crore by 2020.

The real estate market is perceived to be in the dumps, and demonetisation has dealt it a near-fatal blow. Yet, when Indiabulls announced its results for the quarter ended December 31, its earnings were up 24 per cent year-on-year, while assets under management registered 31 per cent growth (see Consolidated quarterly data). Its spread (the difference between portfolio yield and cost of debt) of 300 basis points is, analysts say, better than most others in the industry. 

Banga believes that contrary to public belief, affordable homes in most markets are moving at a fast clip: the outskirts of Mumbai, Pune, Bengaluru, Hyderabad, parts of Chennai and select projects in Gurugram and Noida. In Gurugram, the government has eased the density norms for developers, which, Banga says, will bring down the cost of construction and lead to an improvement in the supply of affordable homes.

This section of the market, according to him, will do better in the days to come. Simple back-of-the-envelope calculation will show why. The current home loan rate is 8.65 per cent; taking into account the income-tax relief on offer, the real rate on a loan of Rs25 lakh works out to around 3 per cent. And rental values of such homes are 2.75 to 3 per cent of the capital value. In other words, the rent covers the EMI more or less. In other words, the house pays for itself. “The market,” says Banga, “is set for a prolonged bull run.”

Loans for the young buyer

Keeping this in view, IndiaBulls launched ‘Smart City Home Loans’ in Tier-II and Tier-III towns, with an average ticket size of Rs15 lakh and an upper limit of Rs40 lakh, in October. These loans, brokerage house Edelweiss reckons, contributed 6 per cent of the incremental disbursals in the last quarter.

There are three categories of players in the market: public-sector banks, private banks and housing finance companies. The PSU banks, Banga says, are at a disadvantage because they are unable to get their people to camp at construction sites, which is where most customers are bagged. Also, given their high non-performing assets and the massive provisions they need to make for such assets, their yields are extremely thin, which makes them uncompetitive in the long run. That may be fine but such banks still enjoy tremendous brand equity with the public. 

The private banks are as nimble as the housing finance companies, Banga admits. But he says that they are bound to lose interest in home loans once the demand for corporate loans improves. “Builders don’t like this volatility,” he says.

Amongst the housing finance companies, Banga plans to stay ahead of rivals through technology. 

Initially, Indiabulls’s strategy was to start engagement with the customer early — even before he had zeroed in on a property. Recently, it decided to take a new pitch. As most of the customers are below 30, Banga has decided to strike a chord with them through the second version of Indiabulls’s e-home-loans.

Here, the customer can transact digitally. The KYC details the branch accesses from the Aadhaar card. For bank statement, Indiabulls has tied up with 53 banks which have agreed to give it a one-time peep into the accounts of prospective customers. Income-tax returns are accessed from the website of the income-tax department. Creditworthiness is assessed from data provided by CIBIL. And the mortgage registration is checked with the Central Registry of Securitisation Asset Reconstruction and Security Interest.

With these initiatives, Banga hopes to double disbursals by 2019 without adding to its staff strength of 6,500. At the moment, according to Banga, 16-17 per cent of the customers complete most of the processes digitally, while 11 per cent go the whole hog. Banga claims he has the first mover’s advantage in digital loan processing, which will help him stay ahead of rivals.

Keeping costs low

The digital push, analysts say, will help keep costs under check, which will only add to Indiabulls’s spread. 

To maintain a healthy spread, Indiabulls has been looking around for low-cost funds. It raised Rs 7,000 crore through 8.55-9.15 per cent non-convertible debentures in September. Indiabulls raised its first overseas issue of Rs1,330 crore through unrated rupee-denominated “masala” bonds with a tenure of 3 years and 1 month bearing a coupon of 8.57 per cent, also in September.

The recent reduction in the MCLR (marginal cost of lending rates)-based interest rates helped Indiabulls in the September-ended quarter: though the yield declined 53 basis points year-on-year, the cost of funds dropped 60 per cent.

According to a recent analyst report by Motilal Oswal, Indiabulls’s return on equity has improved from 3 per cent in 2008-09 to 26 per cent in 2015-16. The report expects it to cross 30 per cent by 2019. Its net NPAs at 0.85 per cent and gross NPA at 0.36 per cent at the end of the last quarter were steady. The impact of demonetisation was minimal: net NPAs dropped marginally from 8.3 per cent in the quarter ended September 31. Its collection efficiency, at over 99 per cent, remained robust in spite of the challenging times. 

A report by Bank of America Merrill Lynch makes the point that Indiabulls’s “ability to demonstrate consistent quality of book for the last six years has led to credit rating upgrades along the way. This has allowed it to alter its liability profile.”

With the market ready to pick up, Indiabulls will need all the firepower it can muster.